India has stood out as a resilient economy that has weathered the headwinds of global macroeconomic dynamics of inflation, recession and supply chain disruptions. India must leverage its economic momentum to drive a projected 6.5-7% GDP growth in FY24. This year’s Budget therefore ought to lay the framework to deliver on this potential.
This will be the first ‘normal’ Budget in the aftermath of COVID-19, and I believe we must address the needs of a cross-section of sectors. Global competitiveness ought to drive taxation and domestic consumption ought to support concessions for the common man. Aligning corporate tax rates to between 15-20% will drive both investment and expansion in large industry. Small and medium-sized enterprises (SMEs) affected during the pandemic expect some tax incentives and benefits to overcome their setbacks. The impact of a weak Indian rupee and an expected uptick in crude oil will also need to be factored in while balancing the Budget. I look forward to a bold budget being presented by the Finance Minister on 1st February.
Focus on Driving Research & Innovation
If India is to deliver on its aspiration of becoming a $10-trillion economy by 2035, we will need to pursue value-added growth. And research and innovation are fundamental to driving this kind of value-added growth. Fostering a robust research ecosystem can boost India’s intellectual capital, thereby driving the kind of innovation that helps improve the lives of ordinary Indians and creates lasting global impact.
Prime Minister Narendra Modi, in his recent address at the 108th Indian Science Congress, has articulated the strategic role that Science & Technology will play in the country’s future. PM Modi has said we will have to make India “the most advanced laboratory of modern science.” In this context, I expect Budget 2023 to have a strong focus on research and innovation.
The government has been incrementally funding, basic and translational research up until now. This, coupled with a burgeoning start-up ecosystem, is unleashing scientific innovation in the country. It is a matter of pride that India has, for the first time, broken into the rank of Top 40 countries in the 132-nation Global Innovation Index (GII) for 2022.
India needs to build on these advances by putting in place a comprehensive research and innovation strategy. To join the big league of innovative nations, will need to make exponential investments in R&D.
Having identified key thrust areas for research and innovation, we as a nation will now have to back them with the right kind of fiscal incentives, policy support, financing mechanisms, human capital and best-in-class infrastructure.
Increase budgetary allocation for R&D
India’s gross expenditure on R&D (GERD) as a percentage of GDP has remained stagnant at around 0.7% for about a decade, lower than Brazil (1.16%), South Africa (0.83%) and others.
India will need to raise GERD to the long-promised level of 2% of GDP if it wants to consolidate on the gains made so far in Science & Technology.
In 2019, the National Research Foundation (NRF) was envisaged to provide “merit-based and equitable peer-reviewed research funding to universities and public institutions.” Budget 2022 allocated Rs 50,000 crore over five years to the NRF. The government ought to implement and ensure that the allocated funds reach the recipients in a timely manner to realise the NRF’s primary objective of promoting a culture of research throughout the country.
Incentivize private sector to contribute more to R&D
The private sector has traditionally lagged the public sector in terms of R&D investments in India as P&L impact is typically seen as a deterrent for such spending. Increased private sector involvement in R&D will enable India to build global leadership as a knowledge economy, while fostering research, innovation and education in enabling technologies that will propel us into the future. The NITI Aayog has also noted that low investment by the private sector in R&D is retarding the development of the innovation ecosystem in the country.
Fiscal incentives, such as the tax credits, enhanced tax deductions and grants can spur the private sector to increase their investments in R&D to create valuable intellectual property (IP).
Tax Subsidy for R&D
The 200% weighted tax deduction under Section 35 (2AB) on in-house R&D expenditure was available till March 31, 2020. The dilution of this fiscal incentive has coincided with the sharp reduction in R&D spending by Indian pharma companies, resulting in value decreasing as a percentage of revenue from 8% in 2018 to 6.6% in 2021.
In this context, it is important that the government restores the 200% weighted tax deduction on R&D expenses, covering all expenditures pertaining to a product’s ‘lab to market’ journey, including patenting costs.
Research Linked Incentives (RLIs), modelled on the lines of the existing Product Linked Incentives (PLIs) scheme, can also provide the impetus for Indian industry to increase R&D investments, as well as encourage industry to build the much-needed linkages with academia to co-innovate.
RLIs for ‘moonshot’ sectors such as genomic medicines, biologic drugs both novel and biosimilars, complex generics, orphan drugs, precision medicines, vaccines, and next generation antibiotics can lead to building of capacity and world class capabilities across the pharma value chain.
CSR can provide risk capital for innovative research
The Science, Technology, and Innovation Policy (STIP) 2020 has sought to double the private sector contribution to GERD in five years. In keeping with this goal, corporates are allowed to use Corporate Social Responsibility (CSR) funds as contributions to public-funded incubators, research organisations and universities engaged in research in science, technology, engineering and medicine.
The government now has a unique opportunity to increase the ambit of CSR expenditure towards innovative R&D activities in the private sector as well. Private sector research investment can be targeted towards innovative programs that have high inherent risk. For consistency and ease of implementation, the government could mandate that the funds earmarked as risk capital for innovative research should not exceed 25% of a company’s annual CSR budget. Moreover, CSR funds should be solely reserved for funding IP-led and proprietary research aimed at addressing unmet needs.
India has assumed presidency of the G20, or Group of Twenty, an intergovernmental forum of the world’s 20 major developed and developing economies. As the current G20 president, India now has an opportunity to establish its credentials as a leader and a driver of research and innovation. Budget 2023 can provide a huge fillip to create the kind of research and innovation ecosystem that will propel India to achieve global leadership.
The article first appeared in The Times of India on January 18, 2023.